Traders Without Borders, Part 4: Japan

This week on Traders Without Borders, we’re jumping further east to Japan, one of the hottest and most unique markets for retail investors. Japan’s economy experienced a bubble during the mid 1980s and ended in a decade of declines after it burst in 1991. Since then, retail investors have gradually returned to the market, but their investment strategy remains shaped by the “Lost Decade” of economic turmoil. Here are the unique characteristics that define the Japanese retail investing market today.

Forex First

Japan’s forex market dwarfs its equities market, generating around 400 million trades each month from retail traders. In fact, while Japan’s population represents under 2% of the world population, Japanese traders generate approximately 30% of global retail forex trades. The country’s entrepreneurial spirit has inspired many stay-at-home mothers to trade forex on the fly. While women constitute only 5% of British and American forex traders, they represent a whopping 25% of Japanese forex traders.

Proceed with Caution

Japanese investors keep a huge amount of their portfolios in cash: about 53%. For comparison, Americans hold just around 10% cash in their portfolios. For Japanese investors, who are accustomed to market turmoil, cash represents solid downside protection.

With solid cash reserves in their portfolios, Japanese traders are more patient than their international counterparts. A majority of Japanese investors would not re-evaluate their investments if they experienced a 20% decline, compared to just over one third of Asian investors as a whole.

After years of investing in a contracting economy, few Japanese investors are on the lookout for short-term gains. Rather, they invest for the long haul and stay resilient during market swings.

Stocks: Stick to Domestic

As part of their efforts to encourage individual investing, the Japanese government created the Nippon Individual Savings Account (NISA), which is expected to pull 1.3 Trillion Yen into the stock market for the next five years. The NISA account is similar to the American IRA; it allows investors to buy up to 1 million Yen a year in stocks, ETFs, trusts, and real estate with a five-year tax exemption on any gains or dividends.

The result has been a higher allocation of household financial assets into risk-class assets. Because of the tax-advantaged internal market, Japanese stocks are more attractive than their foreign counterparts. Today, only 41% of Japanese investors are focused on international markets, versus 73% of investors globally.

Like other international exchanges, Tokyo’s JPX has enacted serious regulations to protect retail investors and regain their trust. As Japanese investors allocate more of their cash savings to their NISA accounts, we see opportunity in the Japanese market for mobile-focused solutions for retail investors.